Is Real Estate the Best Asset Class?

Joseph Schumpeter was an eminent economist of his time in the 1930s. He came up with the term 'Creative Destruction.'

In simple words, this means every time there is a disruption in an economy, capitalism will find a creative method to not just survive the crisis but also thrive afterward.

Therefore, creativity would lead the way out of destruction brought about by the disruptive forces.

Here are a couple of examples...

New Profit Opportunities from Creative Destruction

Do you remember watching the attacks of 9/11? There was much fear in the world. Many people thought that air travel was dead. Multinational businesses wondered about the long-term setbacks they would have to endure.

But guess what? Mankind innovated video conferencing instead. The need to travel fell drastically. Capitalism found a way to get the job done and cut costs too. Joseph Schumpeter must have smiled in his grave.

Then came the highly disruptive global financial crisis of 2008. Ordinary citizens lost most of their wealth to inflated stock and real estate markets.

They cut back on items of daily consumption including long distance phone calls. The telecom industry gave them smart phones with free audio and video calling. Instant messaging apps were born. Skype was an instant hit.

The fixed line telephone surrendered to the snazzy new smart phones which became a common retail product. Joseph Schumpeter probably smiled in his grave again.

The Real Estate Sector is Back with a Bang

The Covid-19 pandemic was the mother of all disruptions. It took a lot of creativity to come out ahead. But the world did just that.

The big fear in 2020 was that real estate was finished as an asset class. But the sector came roaring back as lockdowns were lifted.

Many developers began offering unique residential apartments like 2.5 BHK. The extra half room is a small room for the home office for the WFH (work from home) executives. We also have smaller 1.5 BHK and bigger 3.5 BHK flats too.

It was a brilliant idea. A go-getting WFH executive can push to reach his targets, come 'home' for a quick home cooked lunch, and then quickly get back to work.

These were also very new constructions. Thus, it roped in new buyers. So real estate developers didn't have to rely on existing home buyers. Joseph Schumpeter smiled in his grave again.

Far from dying, estate is back with a bang. It's for good reason why it has been the asset class of choice of the rich for centuries.

But is the best asset class?

Can Real Estate Make You Rich?

If you ask most people, they will say yes.

But that's not the full picture. What they probably mean is that if you buy a property, it will appreciate in the long term.

This is true. But the property they talk about is often the same house they're living in. You see, when calculating net worth of individuals, the value of primary residence is usually excluded.

Most people who have a high net worth tied up in real estate, fall into one of a few cases.

• They inherited valuable property.
• They bought land or an apartment long ago in a location that developed well over time.
• They did a good commercial real estate deal which paid off handsomely.

In all these cases it's possible to get wealthy but it's not easy. There's a lot of luck involved. Almost no one gets rich of a real estate portfolio from scratch.

The ones who do this usually have a successful business. They invest the spare cash generated by the business into real estate.

This is a time honoured strategy to get rich. But for this strategy to work, you need to have a successful business first. The real estate portfolio comes later.

The rich use real estate (along with bonds and gold) to preserve their wealth...not to create it. Unless their business is real estate development itself.

Best Asset Class?

Many rich folks will agree that it is the best but what about the rest of us?

Well apart from a home, most people don't own additional property. Some do but it's probably a family property. Some may own an office if they have a stable business but no other properties.

The late Rakesh Jhunjhunwala once mentioned in an interview that he wasn't a big fan of real estate and that he only owned a home and an office.

Make of that what you will but we stock market people tend to look down on real estate.

This is a mistake. If you've made a small fortune with stocks, then it's always a good idea to park it in a property as long as it's in a good location.

Real estate may not be the best asset class strictly from a returns point of view because fundamentally strong stocks can do better, especially in the long term.

However, real estate has many advantages.

• It provides steady capital appreciation over time.
• It holds its own against inflation quite well.
• It provides income via rent which tends to increase with time.
• It enables a large investment at a time which could be potentially life changing.
• It’s part of an inter-generational wealth transfer, i.e., it can be passed on to the kids.
• It can be improved. For example, land can be developed into a commercial property.
• It provides many advantages from a taxation perspective, especially for businesses.

For many people these advantages are enough to make real estate the best asset in the world.

However, we believe every investor is different. Everyone's needs and goals are different.

Thus, real estate may not be the best asset for a large percentage of the population. It's fine to never buy a property if you already own one and don't need another.

In such cases it's best to invest in stocks for the long term. They are your best chance to create wealth.

Here are some articles from Equitymaster to guide you on the path of creating wealth in stocks.

Happy investing.

• How to Invest in the Share Market
• 10 Rules for Successful Long-Term Investing
• Your Long-Term Investing Checklist
• Best Stocks to Invest for Long Term in 2024
• 5 Sectors to Bet on for the Long Term (Yes, real estate is one of them!)
• Create Long Term Wealth as India Takes a Giant Leap

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...